Optimal Patent Term and Cross-Industry Measures of Patent Term Sensitivity

Patents are monopolies granted to inventors in order to promote innovation, but they have a limited term because they also impose social costs. There is little empirical research on what constitutes an optimal patent term, or whether patent term should vary across industry categories. We take a first step in studying these issues by examining cross-industry differences in patent term sensitivity. We take advantage of a change in law - the passage of the TRIPS agreement in 1994 - that caused patent term to be measured from the date a patent application was filed rather than the date the patent was granted, thereby reducing patent term by the amount of time an application was pending before the U.S. Patent and Trademark Office. Using a new dataset, we determine what portion of this delay is attributable to the applicant for 307,597 issued patents filed in 1994-1996. This shows, for the first time, how patent applicants in different industries sped up their prosecution behavior in response to the change in law, which gives us a measure of industry sensitivity to patent term change. We predict, via a formal model, that patent applicants in industries with higher profits toward the end of patent term are the applicants most likely to speed up patent prosecution after TRIPS. Our results show that pharmaceuticals patentees sped up patent prosecution significantly, which accords with prior theory on the primacy of patents in this industry. We find, however, that software patentees also significantly sped up prosecution, which is unexpected given prior theory suggesting patents are less important in spurring software development. Additionally, our paper exploits another, separate aspect of the legal change that gave some firms longer patent term extensions vis a vis others. We perform an event study and find that firms receiving longer extensions tended to have higher market returns. We obtain similar results using a new empirical technique known as regression kink design, which addresses potential selection issues. Finally, we test for and find a high degree of correlation between our two new measures of patent term sensitivity. This high correlation helps validate our formal model, suggesting that patentees in industries most likely to receive higher profits toward the end of patent term were the ones most sensitive to the change in patent term rules.